Some statements made by industry leaders should come with a trigger warning. So fare warnings, readers: ridiculous statement ahead. The All Pakistan Cement Manufacturers’ Association (APCMA) is seeking a reduction in duties and taxes on cement to boost volumes, a request that is as absurd as it is disingenuous. The current government is in no fiscal position to reduce taxes on any industry—especially in the midst of an IMF program focused on revenue mobilization reforms—let alone an industry that is making decent enough profits in a major demand drought. For context, in 1QFY25, 16 listed companies reported a combined revenue of Rs164 billion and post-tax earnings of roughly Rs24 billion, up 13 percent from last year. Gross margins improved to 30 percent (from 28%), and net margins rose to 14 percent (from 12%), all despite a volumetric decline in tons of 14 percent. In what universe does this industry need targeted assistance from the government?
This column has previously praised the industry’s investment choices to stay competitive, prioritize operational and cost efficiency, and maintain a contingency plan through the diversification of export markets when domestic demand falters. For these reasons, the cement industry has continued to improve its profitability even amid lackluster demand. In 5MFY25, volumes are down 5 percent from the same period last year. While exports grew (up 29%), domestic demand fell by 12 percent. This decline has consequences—about 45 percent of installed capacity is lying idle. Although exports are growing, they are not growing fast enough. These numbers starkly contrast with the peak industry sales in FY21. Compared to that year (in just 5M), total demand is down 23 percent, with domestic sales declining by 23 percent and exports slipping by 18 percent.
The combination of low demand and reduced capacity utilization has raised flags among cement manufacturers, especially since demand has been consistently falling since 2021. So, how does the industry still make money? The answer lies in tighter cost control, energy investments that are paying off, alternative (more affordable) sources for key fuels like coal, and steady price increases in the market. For context, we calculated per-ton revenue and per-ton costs for 5MFY25 and 5MFY24 and found that revenue per ton sold grew by 12 percent, while costs increased by just 8 percent. In 1QFY25, “other income” as a share of revenue (5%) fully covered the financial costs incurred by the industry (again, in terms of revenue) at 5 percent, which is down from 6 percent. Overheads were higher, but tax incidence was lower.
Evidently, the cement industry is not struggling. It is actually thriving in a storm, and undoubtedly, when demand recovers, earnings will too. One could ask how (in)elastic the demand for cement is to prices and incomes—that is, how sensitive cement demand is to changes in prices and income. Will a price change lead to an increase in demand? It would be an ineffective question. In isolation, yes, there is a correlation between cement price and demand, but cement is not the only commodity used in building and construction. It combines with many other goods and commodities (steel, concrete, bricks, glass, marble, etc.). While significant, it does not contribute the most to the total cost of construction. Should the government then reduce taxes on all building materials?
Inflation is certainly a major factor in the reduced demand for construction, as rising costs have led to massive cost overruns. While government projects eventually get green-lit after long delays in the approval process, private construction is more convoluted. Builders are more likely to abandon projects than continue if they cannot find enough buyers and investors to finance the construction. During times of inflation and suppressed purchasing power, people tend to delay large purchases. This is especially true in a market with virtually no mortgage products available. But even if mortgages were available, the net outcome would likely be the same: reduced demand due to prevailing high interest rates. The result is construction delays, project failures, and investors shifting to more lucrative options.
The cement industry must hunker down and weather this storm. The SBP is likely to remain cautious about reducing interest rates, as a sudden spurring of demand could trigger a fresh bout of inflation the economy cannot afford. Even if growth is a target for the government, it won’t come at the cost of the primary fiscal balance.
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